09 Dec 2019

How to Deal with Oil Market Instability

Graphic representation of market indicators fluctuation overlaid on petrochemical plant background

To call 2019 a volatile year for the oil industry would be an understatement. 

Just about every corner of the oil-producing globe has faced serious challenges this year, leading to destabilization of their oil markets. 

What’s Causing the Trouble? 

Back in May, the head of Libya’s National Oil Corporation (NOC) told reporters that if the political situation in the country didn’t calm down soon, the country was at risk of losing up to 95% of its oil production. In June, two oil tankers, one Japanese and one Norwegian, were blown up in the Gulf. September saw Saudi Arabia’s oil infrastructure attacked by drones, courtesy of Houthi Rebels in Yemen. Instability in Iraq has continued to hinder exports from Basra - and the country is struggling to maintain control of projects in the semi-autonomous Kurdistan region. 

Meanwhile, in countries across Southeast Asia (including Myanmar, Thailand, Malaysia, and Papua New Guinea) political uncertainties and tensions between civil and military leaders are making investors nervous. And in Venezuela, with President Maduro refusing to budge, the oil industry on which the petrostate relies almost entirely for survival continues to be crushed by sanctions. Russian oil & gas exploration has also been hampered by US and EU sanctions.  

You might think that this might be something of a blessing for the oil industry in North America who should have been able to pick up the slack, but it’s only really worked out that way for Canada, which is producing more oil than ever. Mexico, on the other hand, has really struggled to cope with falling production and global oil prices that are fluctuating all over the place. And the US, of course, has a crisis of its own to contend with. 

That’s down to the knock-on effects of the ongoing trade war with China. Beijing has switched from importing oil from America to buying from Iran, which has helped to push down demand for US oil - and with it, oil prices. 

Even areas of oil & gas production that seem relatively stable are looking uncertain now, too. After their initial success, a lot of players in the US shale industry are now seeing falling returns from their investments. Last year, 70% of new wells were drilled to offset falling production from other wells. What’s more, some experts have warned that the same technologies that helped make this industry more profitable in the wake of collapsing oil prices five years ago may also speed up the boom-to-bust cycle, increasing volatility in the future.  

Even if you are in the lucky position of benefiting from rising oil prices in the short term, instability in the sector is ultimately bad news for everyone. Lurches in price make it hard to predict where the industry is going or invest in new projects. Not knowing if the government will forcibly suppress supply to control prices also makes it extremely difficult for refineries to estimate their output in the coming months. 

Well, that’s the bad news over with. So what can you do to make your refinery more resilient?

Surviving the Crisis

Some oil companies, particularly in the US, are seeing the pressure pile up as demand decreases abroad. But as we’ve seen, even those that aren’t yet feeling the pinch are blighted by uncertainty.

For refineries, a major problem with this situation is that it makes it very difficult to decide whether to invest in new technologies and equipment upgrades. Capital expenditure projects mean greater financial risk - and if demand suddenly dries up next month, you could find yourself in a very difficult situation.

At the same time, the risks associated with not getting your operations more productive and cost-effective are pretty high, too. When the market is volatile, you need to ensure that you’re as profitable as you possibly can be during the busy periods, to make up for any slumps.

Any inefficiencies in your processes need to be ironed out as soon as possible, and you need to know you can scale up capacity quickly to accommodate a growing demand profile. But do you really want to splash out on expensive permanent equipment for this, when you may have to scale back again next quarter?

This is where temporary installations come in handy. By renting just what you need when you need it - be that generators, oil-free air compressors, temporary cooling or any other utilities - you can meet any upticks in demand without racking up huge costs on equipment you may not use for a large chunk of the year. 

This also comes in handy during scheduled turnarounds. Maintenance is obviously vital for safety reasons as well as to prevent unplanned downtime at your refinery. At the same time, you’d be forgiven for dreading taking your facility offline during a period of high demand, especially when you don’t know how long the good times will last.

The right rental utilities provider, though, will help you keep your turnaround time to an absolute minimum, for example by rapid-cooling your furnace, or will even prevent you from having to go offline at all. 

That’s because, depending on your setup, there may be a way for you to switch over large parts of your refinery onto backup power, in order to stay productive while maintenance is underway. In fact, we’ve even been able to help refineries maintain production while their cokers are out of action, using an approach called unit decoupling. 

You can imagine how much money an intervention like this could save a refinery over the course of a turnaround. That’s important at any time. When the oil market is unstable, it’s more essential than ever. 

You can’t control demand, but you can control your own costs. To thrive in these troubled times, you need to think carefully about how to keep your operations as lean, responsive and efficient as you possibly can.